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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____to_____.
Commission File No. 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0542208
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
515 Post Oak Boulevard
Suite 450
Houston, Texas 77027-9408
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding as of February 11, 1999, of the issuer's common
stock was 29,925,269 and of the issuer's restricted voting common stock was
2,655,709.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following should be read in conjunction with the response to Part I, Item 1
of this Report. Any capitalized terms used but not defined in this Item have the
same meaning given to them in Part I, Item 1. This report on Form 10-Q includes
certain statements that may be deemed to be "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
are based on the Company's expectations and involve risks and uncertainties that
could cause the Company's actual results to differ materially from those set
forth in the statements. Such risks and uncertainties include, but are not
limited to, the ability to successfully consummate acquisitions, fluctuations in
operating results because of acquisitions and seasonality, national and regional
industry and economic conditions, competition and risks entailed in the
operation and growth of existing and newly acquired businesses. The foregoing
and other factors are discussed in the Company's Annual Report on Form 10-K for
the year ended September 30, 1998 filed with the SEC.
Because of the significant effect of the acquisitions of the Founding Companies
(excluding Houston Stafford) and the acquisitions of the Purchased Companies on
the Company's results of operations, the Company's historical results of
operations and period-to-period comparisons will not be indicative of future
results and may not be meaningful. The Company plans to continue acquiring
businesses in the future. The integration of acquired electrical contracting and
maintenance businesses and the addition of management personnel to support
existing and future acquisitions may positively or negatively affect the
Company's results of operations during the period immediately following
acquisition.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO
THE THREE MONTHS ENDED DECEMBER 31, 1998
The following table presents selected historical financial information for the
three months ended December 31, 1997 and 1998. The historical results of
operations presented below include the results of operations of Houston-Stafford
and the Pooled Company for the three months ended December 31, 1997. The results
of operations of the Company for the three months ended December 31, 1998,
includes the results of operations for all Purchased Companies owned by IES at
October 1, 1998, and the Purchased Companies acquired during the three months
ended December 31, 1998, beginning on their respective dates of acquisition. See
Overview and Basis of Presentation for Financial Statements for further
discussion.
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<TABLE>
<CAPTION>
Three Months Ended December 31,
--------------------------------------------------
1997 % 1998 %
-------- -------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues............................. $ 31,799 100.0 % $ 197,712 100.0 %
Cost of services..................... 25,262 79.4 % 156,745 79.3 %
-------- -------- --------- -------
Gross profit......................... 6,537 20.6 % 40,967 20.7 %
Selling, general &
administrative expenses......... 7,718 24.3 % 21,841 11.0 %
Goodwill amortization................ -- -- % 1,848 1.0 %
-------- -------- --------- -------
Operating income (loss).............. $ (1,181) (3.7)% $ 17,278 8.7 %
======== ======== ========= =======
</TABLE>
REVENUES. Revenues increased $165.9 million, or 522%, from $31.8 million for the
three months ended December 31, 1997, to $197.7 million for the three months
ended December 31, 1998. The increase in revenues is principally due to the
acquisitions of the Founding Companies (excluding Houston Stafford) and the
acquisitions of the Purchased Companies.
GROSS PROFIT. Gross profit increased $34.5 million, or 527%, from $6.5 million
for the three months ended December 31, 1997, to $41.0 million for the three
months ended December 31, 1998. The increase in gross profit was principally due
to the acquisitions of the Founding Companies (excluding Houston-Stafford) and
the acquisitions of the Purchased Companies. As a percentage of revenues, gross
profit increased from 20.6% in 1997 to 20.7% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $14.1 million, or 183%, from $7.7 million for
the three months ended December 31, 1997, to $21.8 million for the three months
ended December 31, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the acquisitions of the Founding
Companies (excluding Houston-Stafford) and the acquisitions of the Purchased
Companies, a non-recurring $4.4 million bonus paid to the owners of
Houston-Stafford during the three months ended December 31, 1997 prior to the
Company's IPO and corporate costs incurred in 1998 associated with being a
public company which did not exist in 1997. Excluding such bonuses and higher
corporate costs, selling, general and administrative expenses as a percentage of
revenues decreased from 10.4% in 1997 to 10.0% in 1998.
OPERATING INCOME. Operating income increased $18.5 million, or 1,563%, from
$(1.2) million for the three months ended December 31, 1997, to $17.3 million
for the three months ended December 31, 1998. This increase in operating income
is primarily attributed to the Founding Company Acquisitions (excluding
Houston-Stafford) and the acquisitions of the Purchased Companies, the
non-recurring owner bonuses in 1997, and partially offset by higher corporate
costs discussed above. As a percentage of revenues, operating income (excluding
the owner bonuses and higher corporate costs noted above) decreased from
approximately 10.1% in 1997 to 9.8% in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash of $4.0 million, working capital
of $77.8 million, $89.0 million of outstanding borrowings under its Credit
Facility, $2.4 million of letters of credit outstanding, and available capacity
under its Credit Facility of $83.6 million.
During the three months ended December 31, 1998, the Company generated $0.9
million of net cash from operating activities. Net cash used in investing
activities was $9.3 million including $7.5 million used for the purchase of
businesses. Net cash flows used in financing activities was $2.1 resulting
primarily from borrowings under the Company's Credit Facility.
On August 7, 1998, the Company increased its three-year revolving credit
facility from $70.0 million to $175.0 million (the "Credit Facility"). The
Credit Facility will be used for working capital, capital expenditures, other
corporate purposes and acquisitions. The amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined), or (b) the higher of
(i) the bank's prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to
an additional 0.5% as determined by the ratio of the Company's total funded debt
to EBITDA. Commitment fees of 0.25% to 0.375%, as determined by the ratio of the
Company's total funded debt to EBITDA, are due on any unused borrowing capacity
under the Credit Facility. The Company's subsidiaries have guaranteed the
repayment of all amounts due under the facility, and the facility is secured by
the capital stock of the guarantors and the accounts receivable of the Company
and the guarantors. The Credit Facility requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of cash dividends on the Company's common stock, restricts the ability
of the Company to incur other indebtedness and requires the Company to comply
with certain financial covenants. Availability of the Credit Facility is subject
to customary drawing conditions.
On January 25, 1999, the Company completed its offering of $150 million Senior
Subordinated Notes (the "Notes"). The Notes bear interest at 9 3/8% and will
mature on February 1, 2009. The Company will pay interest on the Notes on
February 1 and August 1 of each year, commencing August 1, 1999. The Notes are
unsecured Senior Subordinated obligations and are subordinated to all existing
and future senior indebtedness. The Notes are guaranteed on a senior
subordinated basis by all of the Company's subsidiaries. Under the terms of the
Notes, the Company is required to comply with various affirmative and negative
covenants including: (i) restrictions on additional indebtedness, and (ii)
restrictions on liens, guarantees and dividends.
The net proceeds to the Company after the offering of the Notes was
approximately $144 million after deducting underwriting commissions and offering
expenses. The Company used a portion of the proceeds from the Notes to repay
indebtedness outstanding on its Credit Facility. As of February 12, 1999, the
Company has available borrowing capacity under its Credit Facility of
approximately $172.6 million.
The Company anticipates that its existing cash, cash flow from operations and
proceeds from its Credit Facility and the Notes will provide sufficient cash to
enable the Company to meet its working capital needs, debt service requirements
and planned capital expenditures for property and equipment through 1999.
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Through February 11, 1999, the Company utilized a combination of cash and its
common stock to acquire 32 companies and the Founding Companies with total
annualized 1998 revenues of approximately $860.0 million. The cash component of
the consideration paid for these companies was funded with existing cash and
borrowings under its bank credit facility.
The Company intends to continue to pursue acquisition opportunities. The timing,
size or success of any acquisition effort and the associated potential capital
commitments cannot be predicted. The Company expects to fund future acquisitions
primarily with working capital, cash flow from operations and borrowings,
including any unborrowed portion of the Credit Facility, as well as issuances of
additional equity. To the extent the Company funds a significant portion of the
consideration for future acquisitions with cash, it may have to increase the
amount of the Credit Facility or obtain other sources of financing, including
the issuance of additional debt or equity. Capital expenditures for equipment
and expansion of facilities are expected to be funded from cash flow from
operations and supplemented as necessary by borrowings under the Credit
Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during the
spring and summer and lower revenues during the fall and winter. The commercial
and industrial aspect of the Company's business is less subject to seasonal
trends, as this work generally is performed inside structures protected from the
weather. The Company's service business is generally not affected by
seasonality. In addition, the construction industry has historically been highly
cyclical. The Company's volume of business may be adversely affected by declines
in construction projects resulting from adverse regional or national economic
conditions. Quarterly results may also be materially affected by the timing of
new construction projects and acquisitions and the timing and magnitude of
acquisition assimilation costs. Accordingly, operating results for any fiscal
period are not necessarily indicative of results that may be achieved for any
subsequent fiscal period.
RECENT ACCOUNTING PRONOUNCEMENTS
On October 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income," which requires the display of comprehensive income and its components
in the financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. There was no
difference between the Company's "traditional" and "comprehensive" net income.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information," which
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires the
reporting of selected information about operating systems in interim financial
reports issued to shareholders. SFAS No. 131 is effective for the Company for
its year ended September 30, 1999, at which the time the Company will adopt the
provision. The Company is currently evaluating the impact on the Company's
financial disclosures but they do not believe that they will be significant.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for the Company for
its year ended September 30, 2000. SFAS No. 133 requires a company to recognize
all derivative instruments (including certain derivative instruments embedded in
other contracts) as assets or liabilities in its balance sheet and measure them
at fair value. The statement requires that changes in the derivatives' fair
value be recognized as current earnings unless specific hedge accounting
criteria are met. The Company is evaluating SFAS No. 133 and the impact on
existing accounting policies and financial reporting disclosures. However, the
Company has not to date engaged in activities or entered into arrangements
normally associated with derivative instruments.
YEAR 2000
Year 2000 Issue. Many software applications, hardware and equipment and embedded
chip systems identify dates using only the last two digits of the year. These
products may be unable to distinguish between dates in the year 2000 and dates
in the year 1900. That inability (referred to as the "Year 2000" issue), if not
addressed, could cause applications, equipment or systems to fail or provide
incorrect information after December 31, 1999, or when using dates after
December 31, 1999. This in turn could have an adverse effect on the Company due
to the Company's direct dependence on its own applications, equipment and
systems and indirect dependence on those of other entities with which the
Company must interact.
Risk of Non-Compliance and Contingency Plans. The major applications which pose
the greatest Year 2000 risks for the Company if implementation of the Year 2000
compliance program is not successful are the Company's project estimating and
management systems, and its financial systems applications, including related
third-party software. Potential problems if the Year 2000 compliance program is
not successful could include disruptions of the Company's revenue generation and
collection from its customers and purchasing and payments to its vendors and the
inability to perform its other financial and accounting functions. The Company
operates on a decentralized basis with each individual reporting unit having
independent information technology (IT) and non-IT systems. The Company's most
significant reporting units represent in excess of 50% of the Company's total
revenue. The Company's Year 2000 compliance program is focused on the systems
which could materially affect its business. The Company has completed a
preliminary assessment of its significant operating units and believes that the
systems at these companies are or will shortly be Year 2000 compliant. The
Company currently has assessed its remaining Year 2000 risk as low because:
o the Company is not dependent on any key customers or suppliers (none
represent as much as 5% of the companies sales or purchases,
respectfully),
o the Company has many separate PC based systems and is not dependent on
any one system,
o many of the Company's processes are performed using spreadsheets and/or
other manual processes which are not technologically dependent,
o the Company performs construction and service maintenance on site for
its customers, the work performed is manual in nature and not dependent
on automated information technology systems to be completed, and
o the Company currently believes that most of its systems that have Year
2000 compliance issues are based on prepackaged third-party software
that can be upgraded at nominal costs through vendor supported
upgrades.
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As a result, the Company believes that its reasonably likely worst case Year
2000 scenario is a temporary inability for it to process the accounting
transactions representing its business activity using automated information
systems at certain of its operating units.
The goal of the Company's Year 2000 project is to ensure that all of the
critical systems and processes which are under the direct control of the Company
remain functional. However, because certain systems and processes may be
interrelated with systems outside of the control of the Company, there can be no
assurance that all implementations will be successful. Accordingly, as part of
the Year 2000 project, contingency and business plans are in the process of
being developed to respond to potential failures that may occur. Such
contingency and business plans are scheduled to be completed by the fourth
quarter of fiscal 1999. To the extent appropriate, such plans will include
emergency back up and recovery procedures, remediation of existing systems with
system upgrades or installation of new systems and replacing electronic
applications with manual processes. Due to the uncertain nature of contingency
planning, there can be no assurances that such plans actually will be sufficient
to reduce the risk of material impacts on the Company's operations due to Year
2000 issues. The Company has ongoing information systems development and
implementation projects, none of which have experienced delays due to its Year
2000 compliance program.
Compliance Program. In order to address the Year 2000 issue, the Company has
established a project team to assure that key automated systems and related
processes will remain functional through year 2000. The team is addressing the
project in the following stages: (i) awareness, (ii) assessment, (iii)
remediation, (iv) testing and (v) implementation of the necessary modifications.
The key automated systems consist of (a) project estimating, management and
financial systems applications, (b) hardware and equipment, (c) embedded chip
systems and (d) third-party developed software. The evaluation of the Year 2000
issue includes the evaluation of the Year 2000 exposure of third parties
material to the operations of the Company. The Company has retained a Year 2000
consulting firm to assist with the review of its systems for Year 2000 issues.
Company State of Readiness. The awareness phase of the Year 2000 project has
begun with a corporate-wide awareness program which will continue to be updated
throughout the life of the project. The Company believes that there is not a
material risk related to its non-IT systems because the Company is primarily a
manual service provider and does not rely on these types of systems. The
assessment phase of the project involves for both IT and non-IT systems, among
other things, efforts to obtain representations and assurances from third
parties, including third party vendors, that their hardware and equipment,
embedded chip systems and software being used by or impacting the Company or any
of its business units are or will be modified to be Year 2000 compliant. To
date, the Company does not expect that responses from such third parties will be
conclusive. However, because the Company is not dependent on any key customers
or suppliers, the Company does not believe that a disruption in service with any
third party would have a material adverse effect on its business, results of
operations or financial condition. The remediation phase involves identifying
the changes which are required to be implemented by system for them to be Year
2000 compliant. The testing and implementation phases involve verifying that the
identified changes address the Year 2000 problems identified through testing the
system as part of implementing such changes. Management expects that the
remediation, testing and implementation phases will be substantially completed
during the third and fourth Quarters of Fiscal 1999.
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Costs to Address Year 2000 Compliance Issues. While the total cost to the
Company of the Year 2000 project is still being evaluated, management currently
estimates that the costs to be incurred by the Company in 1999 associated with
the assessing and testing applications, hardware and equipment, embedded chip
systems, and third party developed software will be less than $300,000, which
will be funded with existing operating cash flows and the Company will deduct
from income as incurred. The Company believes that software vendor Year 2000
releases should address the majority of the Company's Year 2000 issues. To date,
the Company has expended approximately $20,000 related to its Year 2000
compliance. These costs were primarily related to the assessment phase of the
project. The Company expects that the majority of its costs related to the Year
2000 project to be incurred in the third and fourth quarters of its 1999 fiscal
year. Because the Company's internal systems are PC-based, management does not
expect the costs to the Company of the Year 2000 project to have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on March 16, 1999.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ J. Paul Withrow
J. Paul Withrow
Vice President and
Chief Accounting Officer
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